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Rado Bohinc: Some Proposals for Adaptation of the Slovenian Tax System and Policy

Growth is slowing down, the public financial situation is worsening

IMAD[1] for l. 2023 predicts Slovenia only 1.6% real growth of the gross domestic product (GDP), which is less than the spring forecast (1.8%) predicted. In the next two years, we expect slightly higher GDP growth again (2.8% in 2024 and 2.5% in 2025). After modest growth in the first half of the year, economic activity in the euro area is also slowing down in the third quarter. Real GDP increased continuously by 0.1% in the first and second quarters (only 1.1% year-on-year)[2].

The public financial position of Slovenia is improving after 2020, when Slovenia reached almost 80% debt relative to GDP, but not enough. According to SORS[3] data, the deficit of the government sector in 2022 amounted to EUR 1,717 million or 3.0% of GDP, and the gross debt at the end of 2022 was EUR 41,242 million or 72.3% of GDP[4]. According to the adopted budget, the budget deficit in Slovenia will reach approximately 3.31 billion euros in 2023, or 5.3% of gross domestic product (GDP), which is much more than the Maastricht criteria allow. Government borrowing is also increasing again. After a big jump in 2020 to almost 80% of GDP, borrowing has moderated to reach over 72% of GDP in 2022, which also exceeds the Maastricht criteria. According to BS[5] forecasts, the state’s deficit should temporarily increase this year with financing after the flood reconstruction, but with the reduction of support measures, with moderate economic growth and higher interest rates, it should fall below 3% of GDP. Government debt as a share of GDP will decrease. [6]

The budget deficit and public debt are increasing

According to the Ministry of Finance[7], all revenues from the Budget of the Republic of Slovenia for the year 2023 amount to 13,377. Of this, value added tax contributes the most to the budget, namely EUR 5,038 million, followed by income tax in the amount of EUR 1,719 million, and only in third place is corporate income tax in the amount of EUR 1,516 million. Excise duties contribute EUR 1,452 million to the budget, EU funds receive EUR 1,778, other revenues EUR 1,332 and non-tax revenues EUR 542 million.

In 2023, following the budget rebalancing, Slovenia is planning approximately EUR 13.38 billion in revenues, which is 13% more than was planned in the adopted budget for 2023. Expenditures are planned to reach EUR 16.69 billion, or 25% more than in the adopted budget. The budget deficit would thus reach approximately 3.31 billion euros, or 5.3% of the GDP[8].

Public debt rose from 22% of GDP in 2008 to over 82.6% of GDP by 2015. Between 2018 and 2022, public debt increased from 70.3 (2018) to 72.3 (2022). In l. In 2019, it fell to 65.4, and then rose to 79.6 in 2020.

Public depth20182019202020212022
in mio32.24631.75237.42438.87941.242
in % of GDP70,365,479,674,472,3
GDP45.87648.58247.04552.27957.038

Vir: SURS

Proposals

It is crucial for the economy to have a stable and predictable tax environment. However, the current situation with various fragmented and uncoordinated real estate taxes, especially building land use compensation, and frequent income tax reform is not stable and predictable. This uncertainty undermines confidence in the Slovenian tax system and, consequently, Slovenian tax competition.

The Slovenian tax system needs comprehensive reform in order to harmonize with international standards and ensure a fair and sustainable revenue structure. Slovenia has adjusted its tax system several times over the years, several times also unsuccessfully. The effectiveness of these changes often depends on the political environment and changes in government. The calls of international authorities for reform and the need for greater public financial sustainability point to the need to reform the tax system in the following directions:

– Elimination of the highest income tax class (+ 50% above 74,160.00); eliminating the top 50% income tax rate would not have much impact on income tax revenue.

– An increase in the tax rate in the second, third and fourth tax classes (27%, 34% and 39%, respectively) in order to contribute to the financing of the reduction in social security contributions for employees; rates in the third and fourth classes could be increased more than the rate in the second class, with the new top income tax rate) not being higher than 45%.

– The income tax rate in the lowest bracket (16%) remains unchanged.

– The general VAT rate should be maintained at the current level, but reduced VAT rates should be abolished wherever products and services taxed at a reduced VAT rate benefit the rich more than the poor.

-Slovenia should introduce a tax on real estate in the amount that applies in other OECD countries, with which Slovenia could collect additional tax revenues in an amount that would compensate for the reduction in social security contributions of employees.

– The introduction of a development cap that would limit the payment of all social contributions above a certain monthly gross salary limit and would cover key professionals in the private and public sector.

-Introduction of a tax incentive when rewarding employees from company profits in the form of ownership (share or option) or cash scheme

-Increase of the tax deduction for pension savings from EUR 2,600 and 5.9% of gross salary to EUR 5,000 and 10% of gross salary

– The proposal to reduce corporate income tax from 19% to 15% is not justified, but it would be reasonable to consider the proposal on progressive taxation of profits by taking into account the ratio between the amount of funds for the payment of profit and the amount of funds for the payment of labour costs, so that a smaller profit tax was paid by the company that has this ratio more balanced.

To summarize:

1. A reduction of employees’ social security contributions in the amount of at least 5 percentage points is proposed. Slovenia is among the countries with the highest wage burdens. In OECD countries, social security contributions amount to 26% of total tax revenues on average, while in Slovenia it is almost 40%. A Slovenian employee with an average salary receives 66.3% of the gross salary. The average in OECD countries is 75.2.%.

2. The reduction of social security contributions can be financed by expanding the VAT base and by strengthening the role of real estate tax while simultaneously reducing the role of income tax in the financing structure of municipalities.

3. Abolition of the highest income tax class (+ 50% above 74,160.00 and an increase in the tax rate in the second, third and fourth tax brackets (27%, 34% and 39%, respectively) is proposed. The new top income tax rate) should not be higher than 45%. The income tax rate in the lowest class (16%) remains unchanged.

4. Real estate tax is a tax source that is unused in Slovenia and causes inadequate savings habits of the population and does not encourage the sale of vacant properties. Compared to other EU members, Slovenia has the fifth lowest real estate tax rate as a percentage of GDP among the EU-27. On average, property tax in the EU is 1.8% of GDP, with France having the highest rate at 4.0%. The Slovenian rate is much lower at 0.6% of GDP


[1] Institute for macroeconomic analysis of the RS

[2] https://www.umar.gov.si/fileadmin/user_upload/napovedi/jesen/2023/JNGG_2023_s.pdf

[3] Statistical office of the RS

[4] https://www.stat.si/StatWeb/News/Index/11376

[5] Bank of Slovenia

[6]BS, Pregled makroekonomskih napovedmi, December2023 https://bankaslovenije.blob.core.windows.net/publication-files/pregled-makroekonomskih-gibanj-z-napovedmi-december-2023.pdf

[7]https://www.gov.si/assets/ministrstva/MF/Glavno-urednistvo/Novice/DOKUMENTI/Infografika-2023/Infografika-Drzavni-proracun-2023

[8] https://www.gov.si/novice/2022-09-28-vlada-potrdila-proracuna-za-leti-2023-in-2024/

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